Wage labor and capital (2 charts)

The profit share (in the second chart) is the highest it’s been in the postwar period, while the labor share (in the first chart) has fallen to its lowest level.

This is precisely what mainstream economists—both neoclassical and Keynesian—don’t want to talk about: the profit share is high because the labor share is low. The data indicate that, both in the run-up to the crash of 2007-08 and now during the Second Great Depression, the rate of exploitation in the United States has been increasing.

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The reason for this development is perhaps near at hand: business concentration on global markets and – closely connected – concentration of wealth. Take a look at this chart showing the income share of the Top 1 Percent of the US-Households (1912-2008):

It was highest just before the crash of 1929 and nearly as high again in 2007!

What we are doing today again is trying to stabilize something that can´t be stabilized, because its specific structure is the main source of systemic instability. “Too big too fail” is our jusitification, but “downsizing” seems to be the only solution.

Income redistribution alone won´t help, because highly concentrated, mature global markets dominated by just a few very large companies/banks are on the one hand a guarantee for a prevailing cost reduction regime and on the other a solid basis for “eternal” winners (take a look at this study: http://arxiv.org/PS_cache/arxiv/pdf/1107/1107.5728v2.pdf ). This is consistent with what the two charts show, but it is definitely not with what neoclassical theory tells us and politicians about what free markets and competition leads to in the end.

It is necessary to tackle initial distribution. Of the three classical factors of production land and capital are inanimate and passive; only labour is active and human. Landowners cannot and do not change in any way the value of their land. Land values are derived from what is given by nature and the activities and investment of the whole community. All land rent should be collected to form the main tax base. Physical capital (real capital) is used by labour, not by its owners. who merely provide the finance to purchase it. They are therefore only entitled to the repayment of the finance capital plus the service they provide in the form of interest and risk premium. Labour is the only factor which truly earns its return. Get that right first, then redistribute this via taxation to those who cannot work.

Carole – whatever was going on between 1940 and 1970 was working.
Your land tax didndt figure then. It doesnt figure now. The difference is governments handed out mighty tax breaks to the rick under the premise of trickle down and it failed miserably. Lets not get too complicated or go offon another ideological theory (Henry george’s?)

We just rewind what we undid that stuffed everything up and that was tax rates on the rich.

Well, I don’t think that things were that perfect back then. Remember Cathy Come Home? But it’s true that income tax rates started to come down at the end of the 70s. This combined with the relaxation of credit and capital controls plus the home ownership push (which really enslaved workers and kept them meek) plus the Tories’ deliberate policy of unemployment to enforce the latter. How do we put all these back in the box?

The free market economists Wilhelm Roepke, one of tthe architects of the German social market economy after the war, realized that a market in a society with a small super rich elite and a mass of poor and a market in a society with a large middle class functioned differently. Society not the market was the (a) significant factor. So Roepke, the free market advocate acknowledged that the state must go beyond the market to protect the weak, equalize interests, set the rules of the game, etc. So that markets would have the properr socidety in which to flourish. Neo-classical economics usually leaves society out of its assumptions, which are based on the individualiztion of agents and services. Results in early 21st century, mass malditribution of incomes, high rates of private borrowing to sustain growth until borrowing capacity runs out and the economy enteres depression. Economists who ignore the social factor do so at our peril.

I think that Roepke meant that Keynes was just another neo-classical economists who encountered the problem of unemployment in the 1930s and introduced the deus ex machina of government pump priming to raise economic activity to a level where equlibrium could be reached with full employment. That’s better than orthodoxy, but it is still just fiddling with the system. What Roepke meant is that we have to go outside the markets to find solutions through reform of civil society. If the institutions of civil society function equitably then no govenment intervention will be necessary Right now they don’t. For example: the system of control called director primacy leaves decisions about the distribution of profits in a company to the ceo with the advice of the board members he/she essentially appoints. There isn’t even any stockholder primacy. Guess who gets the money, the top 1%/ If you want more equity in the distribution of emoluments and more money in employees-consumer pookets set up compensation committtees elected by employees, stockholders, and customers. That’s a legal step not an economic one. Such an arrangement should redistribute income without tthe heavy hand of the government being involved (the Keynesian way). With institutions in civil society functioning well, the free markets can flourish.

Alice, LVT is not a panacea but it is very simple to enact. Transferring the ownership of capital to labour so workers get their full return is not. The richest British citizen still owns half of Mayfair and Belgravia. Imagine what his LVT bill would look like.

Alice

July 7, 2012 at 10:58 am

Carol – you can hand your land tax as long as economists finally get around to giving up their largesse of models to financial institutions and high net wortth individuals and start working for the good of the economy again but the first thing they have to do get on with their job and stop telling bare faced lies about the benfits of not taxing the rich.

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